What a year! Gamestop share price goes to the moon event. China government crackdown on tech and Evergrande possible failure. There are a lot of things happening this year. I probably can’t recall all of them. But let’s see…
Gamestop
Gamestop is a retail company that sells games related items.
My friend and I always talked about the good old times where we used to buy
games, comics, and related accessories from Comics Connection. When the Comics
Connection management decide to cease operations, I didn’t miss it, as I can
read manga online and buy games from Steam. You can say I am not a loyal fan of
Comics Connection.
Gamestop is facing the same problems for years. The gaming
industry has faced piracy issues and seemingly found a way to deal with it, by
selling digital copies of their game and letting the customer download the
games online straight. Not only the sellers can mark that digital copy they
just sold with a digital code called DRM, but they also find a way to add value
to the games they sold. For example, you can modify it, enhance it, play with
friends and strangers, and maybe more.
It isn’t that a physical copy does not have its value. But
usually, its value is more for a collectible. CDs and DVDs will deteriorate
over time, making it not a good way to store information. Recognizing this, the
gaming industry assists their customer by keeping a record of what they
brought. Even if the customer’s pc was formatted and lose the game installed,
the game platform can still allow the customer to re-download it without any
cost.
It is no wonder the retailers, especially Gamestop, faced
such overwhelming difficulties to maintain their revenue. Their best bet is
selling physical products, like console and console accessories.
Hedge funds anticipate the Gamestop may go out of business
(or whatever their reason is), and short the stock. And they short it heavily.
And Reddit’s Wallstreetbets comes into play. Not only did
they explain what is going on, but they also create this perfect storm called
the Short Squeeze.
Fast forward to November, the US government conduct an
investigation and there are a lot of interesting findings.
The short squeeze did happen, but the Hedge funds are not ruined.
The short squeeze does cause the Gamestop share price to go
up quickly, but Hedge funds were able to exit from their position and cut
losses quickly too. They did suffer a loss, but it isn’t to put them to
destruction. The remaining ride upwards was created by the demand of the
buyers.
As value investors, we are advised not to short a stock. As
the potential loss can be infinite while the gain is limited. Gamestop is one
of short position worst nightmare. Thus serving as a great reminder to value
investors.
The Hedge funds did a great job in sticking to their plans
and did not suffer total ruinations. I think the lesson here is to stick to
your exit plan when the market does against you and don’t hesitate. In other
words, discipline.
That short squeeze happened because there was a lot of
information out in the market. Thus, it is important to know that a lot of
information is out in the public and people can use this information against or
for you. Thus, we need to be prepared for our worst-case situation too.
Although the hedge fund had closed their short positions,
some participants were still under the impression that the hedge fund was still
in the position and out to punish/revenge against them or profit from them by
pushing the price higher. The actual short squeeze is short-lived, but the
rally is coming from the bullish participants instead. This information is only
revealed after the US government concluded its investigation. What I learn from
this is that reliable and conclusive information is kind of takes time to
surface.
The market participants have all kinds of reasons to join
this event and created this short squeeze. As such, although this is a piece of
old advice that the market is irrational. We can never know how many people
doing this for money or revenge. However, the result is the Gamestop rally.
Chinese Government Crack Down
There are a few companies that were under the Chinese
Government crackdown. Alibaba and Tencent's share prices were affected
severely. While the Chinese Government’s main goal is to ensure the country can
prosper further, the internet keeps churning out a lot of conspiracy theories
and blaming the Chinese Government. I think the biggest causality is the
education companies that were listed. With a stroke of a pen, the Chinese
Government mandates they have to be non-profitable organizations.
Money is important but…
As investors, we are out to make money. As business owners,
we want to provide certain goods or services to earn our income. Although I am
not a parent, I understand why parents wish to provide the best education for
their children so they can earn their keep in the workforce.
But as a government, they consider quite a several factors.
In this case, they have to ensure that future businesses can grow and prosper. They
also have to ensure the future generations’ mental well-being. It isn’t an easy
job and people love to criticize and blame the government.
As such, the government’s job is to protect their citizens,
be it from external forces but also themselves. There are times that people are
pretty bad at making good decisions for them; they make choices that may harm
them instead of benefiting them.
Thus this leads too…
As the Chinese government has a different approach compared
to the USA government, the market deems that the Chinese government is too
unpredictable for their own companies and thus these Chinese companies are sold
in fear.
This emphasizes what the market doesn’t like: uncertainty.
With no end to the crackdown insight, I believe a lot of the Chinese companies
will carry on being depressed.
S&P500 is tough to beat
I admit I have no control over the performance of my stocks.
I can analyze and pick a company that is prospering and growing. But that
doesn’t mean the stocks I brought will increase their share price regardless of
how long I hold them. I may go through a serious screening and research on the
companies I am looking at, there is still no guarantee it will perform.
Luckily, most of the stocks I did bought did increase their
prices. Not immediately, but over some time. And luckily, after a few months,
which is considered fast by most standards.
Although I am lucky, I am still underperforming on some of
my stocks if I were to compare against S&P500.
As such, maybe for next year, I have to consider the
following pointers to improve on:
·
Who has beat S&P500 consistently?
·
What has beat S&P500 consistently?
·
Are those strategies able to copy or mimic
easily?
·
Are those strategies safe?
Reflection
December is the month of reflection. What an interesting
year. Full of opportunities and I learned a lot from observing the market. But
I do need to buck up a bit and find ways to improve myself.
While I do wish I make use of my time more efficiently, I do
manage to learn something and have fun in the process. Because of investing, I
manage to find more time to improve my health by exercising more, playing games
I had not played for a long time, and had coffee sessions with new and old
friends.
Some of the ‘homework’ made previously paid off. And I
shouldn’t stop there. I should keep on the lookout for good companies that will
grow. But I think most important of all; still, keep an open mind to learn
different things. Something that might help me beat S&P 500 performance.
